Government shutdown another blow to U.S. economy

More promising U.S. outlook in 2014 is good for Canada, if Washington can finally overcome gridlock

OTTAWA, Oct. 21, 2013 /CNW/ - The U.S. economy was already struggling in 2013, and the federal government shutdown will mean that real gross domestic product will grow by 1.6 per cent at most this year, according to The Conference Board of Canada's U.S. Outlook-Autumn 2013.

Led by improvement in the housing market and investment spending, real GDP growth is forecast to reach 3.2 per cent in 2014, but both domestic and international risks remain.

"Although the U.S. Congress avoided a default last week, the agreement is a stop-gap measure that failed to solve the basic differences between Democrats and Republicans over taxes and government spending," said Kip Beckman, Principal Economist. "If we go through the same drama in January and February, our projection for stronger growth next year would be in jeopardy.

"Our optimistic outlook for 2014 is also contingent on the ongoing turmoil in the Middle East remaining largely contained, so that oil prices do not spike."

While recent developments in Washington have focused on the deficit and debt situation, the fiscal outlook for the United States is actually improving in the short term. From $1 trillion in 2012, the fiscal deficit is set to decline to $750 billion in 2013 and $563 billion in 2014.

The October agreement to reopen the federal government avoided potentially sharp losses in equity markets that could have shaken business and household confidence. However, the volatility in financial markets could return in 2014 if the poisonous atmosphere in Washington continues over tax increases and entitlement programs.

The higher taxes and lower spending implemented in early 2013 contributed to the weak U.S. economic growth this year. Real household spending is set to increase by a modest 2 per cent this year before rebounding and growing by 3.1 per cent in 2014.

Next year, fiscal restraint measures are expected to ease, and real household spending is set to increase by 3.1 per cent in 2014. Government spending is also expected to make a slight positive contribution to economic growth in the second half of next year.

Furthermore, the U.S. housing market is recovering, which is good news for Canadian exporters. Housing starts are expected to increase by close to 19 per cent this year and by 26 per cent in 2014. Real spending on residential construction is expected to expand by 29.4 per cent in 2014.

SOURCE: Conference Board of Canada